Shock 0.1pc decline in US growth: reaction

The US economy unexpectedly contracted 0.1pc in the fourth quarter, suffering
its first decline since the 2007-09 recession as businesses scaled back on
restocking and government spending plunged. This is how economists reacted:

Gross domestic product fell at an annual rate of 0.1pc after growing at a 3.1pcin the third quarter, the Commerce Department said.

"The big surprise came in defence spending. We thought it would be down a lot, but it was down even more than that at 22pc, Another area that stood out was inventory investment which subtracted 1.3 percentage point from GDP. I'm not deeply concerned about either one of these. Part of the drop in defence spending is payback for a spurt we had in the third quarter. On balance, though, defence spending has been declining for the last year or two.

"On the inventory situation, there is cautious management of inventories, but I don't think we're at the beginning of a major inventory correction.

"On the postive side, consumer spending was reasonably good at 2.2pc. Business outlays for new equipment were strong at 12.4pc and residential construction was solid at 15.3pc."

TOM PORCELLI, CHIEF US ECONOMIST, RBC CAPITAL MARKETS

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"It is easy to be spooked by this number. But there are a couple of important things that need to be considered. The decline was because of inventories and the government, subtracting sizable from growth in the fourth quarter. Having said that, this is a rear view mirror number.

"One thing is fairly certain and that is consumers in the current quarter will succumb as a result of the payrolls tax hike, but that could be offset by an inventory swing. This report is eye opening and shows we are still in an extremely challenging economic backdrop. That fact that inventories were soft enough that is was able to drive economic activity reflects that."

NIGEL GAULT, CHIEF US ECONOMIST, IHS GLOBAL INSIGHT

"There's a huge plunge in defence spending, enormous, 22.2pc in defence spending after a big jump in the previous quarter. That probably took at least apcage point off the growth rate, it may have taken a little more. So that was huge.

"In addition, the third quarter was a big quarter for inventory accumulation. Inventory accumulation slowed a lot in the fourth quarter. Inventories subtracted 1.3pcage points from growth.

"You got a combination of inventories and defence which are taking more than 2pc off the growth rate. That drop in defence is not going to happen again. Clearly the trend for defence is down, but it's probably undershot that trend now. And we're not going to get a 1.3pc drag from inventories every quarter.

"This is, if you like, it's a payback - a severe payback - but a payback for that 3.1 (percent growth) that we got in the third quarter. So if you think we got a 3.1 followed by a minus 0.1, the average of those is about 1.5pc and I think that's what tells you the underlying growth pace of the economy was in the second half of the year.

"So there may be people running around after this talking about recession, I hope not too many, but this is not indicator of recession."

PETER CARDILLO, CHIEF MARKET ECONOMIST, ROCKWELL GLOBAL CAPITAL

"This shows you the fear factor about the fiscal cliff slowed things a lot. It will motivate Congress to come up with a deal and not let the sequester activate. (The decline comes) "if you cut too much government spending, and now with higher taxes kicking inn, that slows the consumer even more."

"The market is due for a pullback. I'm not sure if this is going to be the reason for it, maybe what the Fed says this evening certainly could. The Fed is probably going to continue to be somewhat dovish in their statement later today."

"A surge in (government bond) yields is probably not going to happen so that is good."

TERRY SHEEHAN, ECONOMIC ANALYST, STONE & MCCARTHY RESEARCH ASSOCIATES

"The decline was certainly not what the market expected. There was less inventory growth than expected, exports were a drag and there was a big drop in government purchases.

"We have a slowing in government spending associated with the fiscal situation as well as some drawdown in military activity. This is also the preliminary estimate, much of it based on Commerce Department assumptions. This could be revised, hopefully upward, in the next report. This report doesn't have immediate implications for Fed policy. They will be unhappy with it, but it's one quarter's number.